LOS ANGELES - In an uncommon development. institutional investors have snapped up a stand-alone, long-term issue for a sports arena that has not yet been built.
The $155 million taxable issue, sold yesterday in Portland, Ore., has a 27-year maturity. Other major arena projects initially have depended on bank loans or letter of credit-backed financings featuring maturities of 10 years or less.
The issue, known formally as Oregon Arena Corporation 8.99% First Mortgage Construction and Term Notes, will fund a new arena to house the Portland Trail Blazers basketball team and to accommodate other entertainment events.
"This is the first [stand-alone] arena project financing successfully sold to sophisticated institutional investors" at the outset, Aaron Barman, a managing director of public finance at Prudential Securities Inc., said in a release.
No taxes provide direct investment or support for the project, so the financing must stand on its own merits from an investor's standpoint. The deal was structured as a taxable sale because it involves a private arena.
Nevertheless, the financing team included public finance specialists. And participants in the tax-exempt market also are increasingly interested in how such deals are structured because, with bank loans unavailable or unattractive, such long-term nonrecourse deals are expected to grow in the public markets for everything from independent power projects to toll roads.
Prudential Securities received more than $215 million of orders for the $155 million arena debt offering, Barman said, adding "we consider this very impressive in today's credit-crunch environment."
Prudential raised the funds through a private placement with nine institutional investors.
Prudential Power Funding Associates, which operates independently of the Prudential underwriting unit, led the group of private buyers with a $70 million investment.
Prudential Power, often associated with investment in electric and gas utilities, was attracted to the proposed arena because the project met the company's standards for a sound investment, said Mark Gardiner, a managing director of Public Financial Management Inc. in Portland, the financial adviser on the issue. The project "is an infrastructure financing from their point of view," he said.
"I think you're going to see a lot more" arena financings like this one, so long as investors are comfortable with their feasibility, Gardiner said in an interview this week.
The financing is also underpinned by investment-grade ratings, which Barman said was a first for a stand-alone arena project before construction.
Fitch Investors Service Inc. rated the debt BBB. Standard & Poor's Corp. assigned a private placement grade of PPR-2-minus, which "indicates that the issue is of high quality, exhibiting characteristics indicative of low ultimate loss," according to the agency's rating report.
Gardiner said the Standard & Poor's assessment is high enough to allow insurance companies to purchase the notes.
Adds Some Certainty
Primary security for the debt is provided by contractual income from the arena, including preferred seating and suite sales and a long-term lease with the Trail Blazers.
The suites, which cost from $65,000 to $135,000 annually, are already sold out, which eliminates some of the uncertainty about anticipated revenues, Gardiner said. About 80% of the suite sales involved nine-year lease terms, he said.
Confirmed orders also are in hand for more than 60% of the available preferred seating and courtside seating, officials say. Renewals for the suites and preferred seating will be arranged so that they do not all fall at the same time, Gardiner said.
The deal does not depend on the Trail Blazers alone, but instead stresses the arena's importance as a long-term business and entertainment complex, he said. Investment bankers have learned from previous financings that "you can't sell these things on the success of the franchise" alone, Gardiner said.
Alan Spen, manager of Fitch's revenue group, said the sports team's track record was an important part of the assessment by the credit agency.
"Our feeling was that [the Trail Blazers are] a dominant team in a large regional market," said Spen, who noted that the team "has a demonstrated history of selling out" in both good years and not-so-good years. Other arena financings might not have that advantage, he said.
The team's "strong management" and overall cost controls also provided comfort, Spen said, adding that the arena financing remained relatively strong even under "many sensitivity analyses" that examined the effect of falling attendance.
"My belief is you're going to see more" of these deals in the capital markets, particularly if they can qualify for an investment-grade rating upfront, said Spen. He said Fitch has provided a private credit opinion on a separate arena transaction.
Investors also have to weigh the risks, he cautioned, because sports arenas are not viewed as an essential service when compared with projects such as power and water facilities.
The cost of arenas also is escalating to fund larger facilities with more amenities, Spen said, so revenues must be "significantly greater" to cover debt service and provide a reasonably good profit if private investors are involved.
One special feature of the Portland transaction is a $46 million equity contribution from Paul Allen, owner of the Trail Blazers and the Oregon Arena Corp. That evidence of commitment provided added comfort for rating agencies and note investors, according to members of the financing team.
The Oregon Arena Corp., of which Allen is the sole stockholder, was formed for the purpose of designing, constructing, developing, owning, and, upon completion, operating the project.
The Tax Reform Act of 1986 rules out tax-exempt financing for most stadiums, and from the beginning the Portland arena has been planned as a private, taxable endeavor, Gardiner said.
But the typical terms required for bank involvement were unattractive, Gardiner said.
The biggest problem was the shorter maturities, which often require using almost all of a project's cash flow to retire debt. Allen wanted to realize some return on his equity investment in the earlier years, Gardiner said.
In addition, a second long-term loan would need to be arranged in a few years, Gardiner said. By contrast, the 27-year maturity on the notes locked the deal in at a time of generally favorable market conditions, he said.
The project is also receiving a loan of $16 million from the Bank of America and Seattle-First National Bank. Finally, $10.3 million is anticipated from investment income on project funds that have not yet been spent.
Although tax dollars are not pledged to the project itself, Portland plans to pay for up to $34.5 million of related public improvements, including additional parking facilities, roadways, landscaping, and lighting. Portland Mayor Vera Katz praises the project as an example of a public-private partnership that helps the central city area.
Gardiner said the city has obtained a line of credit to cover those construction costs, and eventually plans to replace the line of credit with long-term tax-exempt proceeds.
A contract requires the Oregon Arena Corp. to pay the city user fees equal to 6% of ticket sales using the base ticket price for events in the new arena, as well as those held in the existing Portland Memorial Coliseum that is next door. Together with parking revenues, the fees are expected to cover the public improvements paid for by the city, Gardiner said.
The arena is only two blocks from the convention center, and could help nearby hotels, Gardiner said. Portland also will collect property and business taxes on the new arena itself, he said.
Also to Oversee Coliseum
Planning for the new arena began in 1990 because the existing 12,800-seat Coliseum, which was built in 1960, was not large enough to allow the Trail Blazers to stay competitive in the National Basketball Association, Gardiner said.
The arena will seat up to 20,340 spectators, depending on the event.
In another feature of the deal, the Oregon Arena Corp. will assume management of the existing Coliseum on July 1. That will assure coordinated scheduling, operating, and financial control for the two venues, according to the private placement memorandum, and also give the management "significant advantages in attracting a wide range of events."
The new arena is scheduled to open in the fall of 1995. Almost $35 million of the various moneys being raised for the project will fund a capitalized interest account to cover interest payments through Nov. 1, 1995.
In addition, Prudential Securities Group Inc. has agreed to Provide a credit facility that will provide for redemption of the debt at par, before maturity, if the project is not completed on a timely basis.
Allen, however, is not personally guaranteeing any payments on the notes.